Case scenario:
Brickman Apparel produces equipment for the extreme sports market. It has four peak periods, each lasting two months, for manufacturing the merchandise suited for Spring, Summer, Fall and Winter. In the Off-peak periods, Brickman schedules equipment maintenance and runs advertising to generate demand for its upcoming seasonal merchandise, Brickman's controller, Sascha Green, wants to understand the drivers of equipment maintenance costs and the effects of advertising expenditures on sales. A regession analysis of teo years of monthly data yields the following relationships.
Maintenance costs = $21,000 - ($2.20 per machine hour x Number of machine hours)
Sales Revenue = $310,000 - ($1.80 x advertising expenditures)
Upon examining the results, Green comments, "So, all I have to do to reduce maintenance costs is run my machines longer?! And, clearly our advertising function is broken: The more we spend on advertising, the lower our sales revenue."
Q1. Explain why Green made this comment?
Q2. Suggest a more economically plausible relationship between monthly maintenance costs and monthly machine hours. Justify your choice.
Q3. Suggest a more economically plausible relationship between monthly sales and advertising expenditures. Justify your choice.